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Gail Kelly was a dud and other mysteries

Michael Pascoe

So Westpac's Gail Kelly, potentially the $55 million CEO according to the latest beneficent offer from her board, was a dud CEO at St George. Or the Australian Competition and Consumer Commission's Graeme Samuel is a fool. You choose the correct statement and disregard the other.

Those alternatives were (perhaps unintentionally) proposed in yesterday's Chanticleer column in the Australian Financial Review, which claimed St George could not have survived the global financial crisis as an independent entity as it “was too heavily exposed to the securitisation market”. According to Chanticleer and general market opinion, that's why Samuel waved through Westpac's acquisition of St George in 2008.

If the Westpac takeover didn't have to happen – if it wasn't another case of the regulators and bank club quietly engineering the solution to a crisis – Samuel has to be marked as a failure. That takeover remains the biggest single reduction in banking competition since the big four emerged from Large Six-and-a-few-bits. The current grandstanding about competition in banking is nonsense by comparison – mere Movember bum fluff.

Alternatively, the St George that allegedly would have failed without Westpac's rescue was Kelly's St George – there had been no substantial change at the bank since Kelly hit the jackpot when Westpac purchased her in 2007. Under the Chanticleer scenario, instead of being hailed as one of the world's most powerful women, Kelly was on track to being reviled as a complete disaster – the woman who ran St George on an unsustainable basis and thus into failure when global winds blew cold.

The CEOs and boards of failed and/or bailed banks in Europe and the US aren't regarded as particularly smart individuals. They stuffed up very big time and caused enormous pain and suffering. The idea that Australia had a couple of banks that were only saved from such a fate by official and unofficial intervention has interesting implications.

Take Suncorp – ANZ nearly did. It's generally understood that the Brisbane-headquartered financier of choice for many a property developer was at the altar with ANZ in order to save itself when the Federal Government interrupted proceedings with its offer of explicitly guaranteeing Australian funding. The wedding was cancelled, the bride instead running off to reconstruct itself under Canberra's protection.

But if the background story holds true, if Suncorp was about to fail unless taken over or government guaranteed, how have the chairman and fellow long-serving directors kept their jobs? The concept of being held responsible doesn't seem to penetrate our boardrooms – that's best left to small fry who can't afford flash lawyers.

The Chanticleer scenario could lead to an interesting re-write of history. Aside from a prominent CEO and a couple of boards not actually being good at their jobs, running their banks too close to the wind, it also would mean that our key watchdogs – APRA and the RBA – aren't the world champions they've appeared to be. What would the verdict be on APRA if most of the banking below the Big Four and above the credit unions had been shown to be unsustainable?

Maybe that would explain why APRA has been much more bolshie of late, writing directly to bank boards rather than management, cracking whips over various ratios it had previously ignored, individually interviewing directors of deposit-taking institutions. APRA too might have dodged a very embarrassing bullet.

But life, banking and financial systems are full of mysteries and unknowns – like the Reserve Bank rather pointedly changing its tune in yesterday's board minutes about the banks increasing rates by more than the cash rate movement. Again, it's only hypothetical, but maybe the board had had enough of the Canberra's political nonsense.

And those RBA minutes, gee, they would be revised after the meeting, would they? No, the RBA board must just be amazingly prescient.

Michael Pascoe is a BusinessDay contributing editor and, by way of disclosure, of course the Pascoe family super fund holds bank shares, including Westpac.

62 comments

Well argued Michael and very topical. The incestuous relationship between banks and govt needs to end, much like the all to cozy relationship between govt and media.

Commenter

Shouganai

Location

Wanganui NZ

Date and time

November 17, 2010, 8:01AM

So Gail Kelly couldn't sustainably run a 2nd tier bank to survive a financial crisis and this led to the industry and regulators collaborating to negate one of the players and significantly reduce competition.

We are now left with the legacy of the big 4 banks enjoying weak competition and reaping the rewards by increasing their margins/profitability.

Subsequent to the increased profitibility, the boards and management of the big 4 banks are doing what the finance industry does best. They are creaming more of the revenues that the banks enjoy into the pockets of the management and board members. This is legal theft from the shareholders.

It seems that the boards and management try to convince shareholders that the management has to achieve certain threshholds to get their big rewards. But in reality they sit down and do their forecasting and budgets with the aid of well qualified, smart analysts and strategists and come up with achievable outcomes that are written in to the managers contracts as thresholds that they have to achieve to get their rewards. When are shareholders going to be able to demand that the thresholds that are set have stretch targets that pose a challenge to be achieved.

Commenter

Glynn

Location

Ferny Grove

Date and time

November 17, 2010, 8:12AM

If you think she is a dud now, just wait till the housing bubble explodes. Westpac / St George will collapse, Gail will walk away with millions.

Commenter

Peter

Location

Sydney

Date and time

November 17, 2010, 8:14AM

And yet Ms Kelly gets to be the chief at Westpac - I wondered about that

Commenter

Dr. Duck

Location

Melbourne

Date and time

November 17, 2010, 8:26AM

So once again,let socialism take the losses,and c.e.o.'sfill their saddle bags and take the profits(supplied by the taxpayer)the problem is cliques on the government benches,both sides.

Commenter

gazza

Location

brisbane

Date and time

November 17, 2010, 8:28AM

This is news? Or... put another way... this should have come out a LONG time ago. Dealing in business circles in WA, the subject of St George's precarious position and their truly desperate flight from certain sorts of lending was not uncommon knowledge. I thought it was part of the masterplan as to why Kelly went to Westpac so she could engineer the takeover of St George and save it from the mess she'd help create.. There would have to be extraordinary reasons for both the merger of St George and Bankwest for the authorities to allow such a MASSIVE decrease in competition. Something must be urgently done to restore competitiveness to the bank sector instead of this four-headed monopoly that we have now.

BEEP-BEEP(Banks Earning Excessive Profit - Bankers Expect Extra Package) Why are we not surprise!!!!!Obscene is the word to come to mind.Bankers must be a special breed of the m#####l variety.Come On Aussies - time to walk away from the BIG4 and stop the other 3 big Bankers from competing on who deserves a bigger package.We cannot blame the silent majority in feeling disgusted.

Commenter

Stan

Date and time

November 17, 2010, 8:44AM

evreyone knows that Gail blew up the balance sheet at St George

Commenter

simon

Location

melbourne

Date and time

November 17, 2010, 8:45AM

Interesting scenario. If the govt did not step in to provide the guarantee and pump prime the property markets woudl we have found out our banks really are not that different to those overseas? How woudl they be faring if they were not such protected species?